In the recently reported case of BTI vs Sequana, the Supreme Court has finally answered the above question. Put simply, directors owe a duty to creditors when the company is, or is likely to become, insolvent.
When is the duty triggered?
The Companies Act 2006 requires directors of a company must act in a way which would be most likely to promote the success of the company for the benefit of its shareholders. Sequana clarified this duty and extended it to requiring the directors to take into account the creditors’ interests as well as those of the shareholders upon the company being, or likely to become, insolvent. “Likely” in this instance was defined to mean more probable than not.
What is the content of the duty?
The Supreme Court acknowledged that the duty placed upon directors is dependent on the facts of each particular case. Furthermore, the directors will need to undertake a balancing exercise between the interests of directors and creditors on a sliding scale with the more precarious the financial health of the company the more the interests of the creditors should be prioritised by the directors. For example, where insolvency is inevitable, then the interests of the creditors will be paramount.
What are the implications of this case?
The Judges in the Sequana case were wary not to apply the duty at a very early stage in a company’s financial distress, being eager to promote a rescue culture and to avoid placing overdue stress and burdens on company directors. One of the judges said, “a reasonable decision by directors to attempt to rescue a company’s business in the interests of both members and creditors would not in my view involve a breach of the duty”.
However, the judgement also noted that this is a developing area of law where some of their commentary may be subject to future appeals.
As always, at PBC we strongly encourage directors of companies in or facing financial distress to take advice at an early stage. Doing so increases the likelihood of a company’s survival and reduces the risk of directors falling foul of the duty outlined in the Sequana case. The correct application of a director’s duties is subjective and will always be measured against the individual circumstances. However, determination of conduct will generally rest on whether a director has acted fair (to all creditors) in a balanced approach and without conflict of interest. Get this wrong and a director could expose themselves to personal liability to restore the company to its former position. Get it right and you will be seen as fulfilling your duties.
If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to firstname.lastname@example.org. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.